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Chapter 5: Q.7 (page 164)

Suppose Maria prefers to buy a bond with a 7% expected return and 2% standard deviation of its expected return, while Jennifer prefers to buy a bond with a 4% expected return and 1% standard deviation of its expected return. Can you tell if Maria is more or less risk-averse than Jennifer?

Short Answer

Expert verified

Maria has taken more chances than Jennifer.

Step by step solution

01

Introduction

A standard deviation is a measure of how much data deviates from its mean; the higher the standard deviation, the greater the dispersion, and vice versa.

02

Explanation

Maria is less risk averse than Jennifer since he wants to buy a bond with a standard deviation of 2%, which is higher than J's (1%) standard deviation. The bigger the standard deviation, the greater the return dispersion, and thus the higher the risk of investment. As a result, M has taken more chances than J.

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Most popular questions from this chapter

The demand curve and supply curve for one-year discount bonds with a face value of $1050are represented by the following equations:Bd:Price=-0.8脳Quantity+1160Bs:Price=Quantity+720Suppose that, as a result of monetary policy actions, the Federal Reserve sells 90 bonds that it holds. Assume that bond demand and money demand are held constant.

a. How does the Federal Reserve policy affect the bond supply equation? b. Calculate the effect on the equilibrium interest rate in this market, as a result of the Federal Reserve action.

The demand curve and supply curve for one-year discount bonds with a face value of$1000are represented by the following equations:

Bd:Price=-0.8脳Quantity+1100Bs:Price=Quantity+680

a. What is the expected equilibrium price and quantity of bonds in this market?

b. Given your answer to part (a), what is the expected interest rate in this market?

How might a sudden increase in people鈥檚 expectations of future real estate prices affect interest rates?

What will happen in the bond market if the government imposes a limit on the amount of daily transactions? Which characteristic of an asset would be affected?

Explain why you would be more or less willing to buy long-term Delta Air Lines bonds under the following circumstances:

a. The company just released its financial statements, indicating that income decreased and liabilities increased.

b. You expect a bull market in stocks (stock prices are expected to increase).

c. You have analyzed your country鈥檚 monetary policy and expect interest rates to decrease.

d. Brokerage commissions on bonds fall.

e. Your income and wealth increased over the last two years.
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